Lawyer Article

This article was published in the August 20nd edition of Southeast Tech Wire.

On August 17, 2006, Governor Easley signed House Bill 2170 which provides for the addition of a new Article 3 to Chapter 105 of the General Statutes entitled REPLACEMENT OF BILL LEE ACT (“Replacement Act”). The law differs from the Bill Lee Act in a number of respects. Currently the Bill Lee Act is scheduled to expire January 1, 2008.

The Replacement Act, is effective for activities occurring after January 1, 2007, except for planned projects to be commenced in 2007 on specified sites certified by the Secretary in respect of which the taxpayer can elect Bill Lee Act treatment. The Replacement Act is more restrictive in some areas, and less so in others, as compared to the Bill Lee Act. The Replacement Act provides for dividing the State’s counties into three development tiers with the tier designation being determined based on four factors, which when calculated, result in the determination of a development factor for each county. The counties with the 40 highest development factors will be ranked in tier one, the 40 counties with the next highest development factors will be ranked in tier two, and the remaining 20 counties will be ranked in tier three. Credits for creating jobs, the threshold numbers of jobs required to be created, the percentage of investment tax credit, and any applicable investment thresholds are set out for each tier in the table provided below.

Job Creation Tax Credit
Tier Level  - Minimum Jobs  - Credit per Job
Tier 1 - 5 - $12,500
Tier 2 - 10 - $5,000
Tier 3 - 25 - $1,000

Business Property Investment Tax Credit
Tier Level - Minimum Investment Threshold - Amount of Credit as % of M&E
Tier 1 - $0 - 7%
Tier 2 - $1,000,000 - 5%
Tier 3 - $4,000,000 - 4%

Real Property Investment Tax Credit*
Tier Level - Minimum Investment Threshold - New Jobs - Amount of Credit as % of Investment
Tier 1 - $10 million - 200 - 30%
*Only available in Tier 1 counties

Each county will be assigned a development tier designation by the Secretary of Commerce each year on or before November 30 based on the county’s development factor. The development factor is the sum of the county’s ranking in average rate of unemployment (prior 12 months), median household income (prior 12 months), percentage growth in population (prior 36 months), and adjusted assessed property value per capita (most recent taxable year) as published by the Department of Public Instruction.

Under the Replacement Act, a taxpayers’ entitlement to tax credits for job creation and investment in business property is subject to a number of eligibility requirements such as the activity engaged in at the establishment, the wages paid (tier two and tier three counties and the new “urban progress zones” have a wage standard), providing certain health insurance, and the absence of unpaid tax debts, significant environmental violations and safety and health violations. The Replacement Act contains no wage standard for earning credits in a tier one county.

The Replacement Act describes 12 types of activity in which a taxpayer can engage at an establishment to be eligible for credits: 1) aircraft maintenance and repair; 2) air courier services hub; 3) company headquarters; 4) customer service call centers; 5) electronic shopping and mail order houses; 6) information technology and services; 7) manufacturing; 8) motor sports facility; 9) motor sports racing team; 10) research and development; 11) warehousing; and 12) wholesale trade. Jobs satisfy the wage standard only if they pay an average weekly wage that is at least equal to the lesser of 110% of the average wage for all insured private employers in the State and 90% of the average wage for all insured private employers in the county. The Department of Commerce is required to annually publish the wage standard for each county. In the case of a new facility, the average wage of all new jobs, taking into account only full-time jobs, collectively must meet the wage standard. In the case of an expansion, all of the existing jobs, taking into account only full-time jobs, must meet the wage standard, and all net new full-time jobs collectively must meet the wage standard.

A number of provisions from the Bill Lee Act are carried forward in the Replacement Act. First, there is a cap of 50% on the use of tax credits to offset the combined tax liability due in any year. Under the Replacement Act, however, the credits can be applied against income tax, franchise tax, and premium taxes or a combination of these taxes of each in respect of the same tax year. The decision as to which taxes to apply the credit against can be made annually. The unused portion of any credit can be carried forward and divided between or among the taxes against which it is allowed without regard to the original election regarding the division of the credit. The general carry forward period for unused credit is five years with certain exceptions allowing 15-year and 20-year carry forward periods.

Development zones as we have come to know them are eliminated. Instead, the Replacement Act provides for more restrictive “urban progress zones,” which must be entirely within the corporate limits of a municipality with a population of at least 10,000, persons and the area in a zone may not exceed 15% of the land within a municipality. The Replacement Act also provides for the Secretary to certify “agrarian growth zones” within counties that have no municipality with a population in excess of 10,000. Eligibility requirements for agrarian growth zones are contained in G.S. § 143B-437.10 and require, among other things, that at least 1/5 of the residents in the zone have incomes below poverty level, that there may be only one zone in any county, and that the zone, less the smallest census tract included in the zone, does not exceed 5% of the total area of the county. The Replacement Act contains a wage standard for urban progress zones and agrarian growth zones of 90% of the lesser of the State average weekly wage and the county average weekly wage. The sur-credit for jobs created in either zone is $1,000, which is increased to $2,000 if the employee lives in the zone or is a long-term unemployed worker.

The Replacement Act also contains a credit for investing in real property in a development tier one area equal to 30% of the eligible investment amount, subject to satisfaction of all of the eligibility requirements relating to the activity to be carried on at the establishment and additional eligibility requirements contained in Section 105-129.89, including a written determination by the Secretary of Commerce that the tax payer is expected to purchase or lease and use an eligible business at that establishment within a three-year period at least $10,000,000 of real property and that the establishment that is the subject of the credit will create at least 200 new jobs within two years of the time that the property is first used in an eligible business. Under the Bill Lee Act, real estate investment credits are available to most central administrative facility investments generally provided that at least 40 jobs are created. Although the Replacement Act contains tax credits for jobs created and investments in business property made in connection with establishing a company headquarters, the Replacement Act provides no credit for investment in headquarters-related real property.

The Bill’s provisions relating to credits for creating jobs and investing in business property relating to a company headquarters are new to North Carolina. There is a threshold requirement for creating 75 new jobs within a 24-month period which triggers a three-year eligibility period for credits under Article 131 beginning with the taxable year in which the job creation requirement is satisfied. A taxpayer cannot extend a three-year period by creating 75 new jobs during a 12-month period in a three-year eligibility period.

Existing projects that have qualified for tax credits, projects for which extended sunsets have been enacted under the Bill Lee Act, other projects that have been committed but not placed in service may be covered either by the Bill Lee Act or the Replacement Act. When an election is provided, credits may be claimed under the Lee Act or under the Replacement Act but not both. The Replacement Act contains a sunset of January 1, 2011, and there are no provisions for vesting benefits or, except in the case of special legislation, any provision preserving credits in effect in connection with multi-staged projects or projects that are expected to be developed over a number of years including activities occurring after the sunset. Accordingly, any business that has earned tax credits or expects to qualify for credits under the Bill Lee Act prior to January 1, 2008, or January 1, 2007, the accelerated sunset under the Replacement Act, should consult with its tax advisor with respect to continuing eligibility under the Bill Lee Act or eligibility for credits earned or to be earned under the Replacement Act. Moreover, the Replacement Act contains numerous conforming provisions in respect of other statutes that refer to enterprise zones or tiers designated pursuant to the Bill Lee Act, which should be thoroughly examined.

Karen Carey
336.721.3536
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Don Donadio
919.755.2102
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Neill Edwards
919.484.2357
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John Hunter
704.331.4951
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